Employers taking closer look at retirement plans

NEW YORK (Reuters) - American workers have lost a fortune invested in 401(k) retirement plans in recent weeks, prompting employers to reconsider how they are managed, experts say.

An elderly man walks through a lobby in Denver, Colorado August 2, 2007. REUTERS/Rick Wilking

Employers are examining such aspects of the plans as how they communicate “to reassure their employees what’s going on with market risk,” said Garry Jerome, who handles defined contribution retirement consulting at Mercer Inc.

“The forward-thinking employer always included a strategy for helping employees with investment risks,” he said, adding, “It would be a little soon for employers to be thinking about wholesale changes as a result of what happened.”

The 401(k) account allows workers to defer taxes on some income and typically put the money in a mix of stock and bond mutual funds and other investments.

Stock-heavy accounts have suffered of late; stocks in the benchmark Standard & Poor’s 500 index have lost more than a third of their value after peaking last year.

Measures passed by Congress encouraging automatic enrollment in 401(k)s, which took effect in January, should help protect against market volatility ahead, said Jack VanDerhei, research director of the Employee Benefit Research Institute.

The average 401(k) account balance has dropped as much as 23 percent this year, he said.

A study of who has lost money in 401(k) plans showed one out of four people within 10 years of retirement had more than 90 percent of the money invested in equities, he said.

Their exposure would have been more limited in automatic enrollment plans that typically would have them invested no more than 51 percent in stocks, he said.

SUBSTITUTING FOR PENSIONS

“In the future, I really think that it’s going to be unlikely to see those people close to retirement age having had this kind of extreme equity exposure, certainly to the extent we just experienced,” he said.

The 401(k) plan, which has grown in popularity as pension plans have diminished, was never intended to be the employee’s primary retirement plan, said Richard Kaplan, an expert in elder law at the University of Illinois.

“There’s nothing inherently wrong with 401(k) plans as they were envisioned, namely to be supplements to defined benefit plans,” he said. “They’ve become substitutes rather than supplements, and that makes every aspect of the plans a little dicier.”

They are popular because they are less costly to employers than are traditional pension funds, which guaranteed set payments, Kaplan said, and employees find them easy. “You just fill out a card,” he said.

Talk of improving 401(k) plans has mostly involved pruning the various types, of which there are nearly a dozen, he said.

The 401(k) plan and personal savings were intended to be part of a “three-legged stool,” along with Social Security and pensions for retirement, said Dean Kohmann, Charles Schwab vice president of 401(k) services.

But with the potential unreliability of Social Security and drop in pensions, “it looks more like a pogo stick,” he said.

“This has become clearly the primary tool that Americans are going to use for retirement,” he said.

Jerome said he expected to see calls for changes to 401(k) plans to emerge in Congress, and Kohmann said he could envision the government playing a larger role.

“If the industry itself can’t be successful in getting more people participating and making better decisions, I think that’s the point where the government then may want to step in and have greater involvement and regulation,” he said.

“Frankly, that’s probably not good for anybody, but I think that’s a wake-up for our industry and for companies that we need to do a better job preparing Americans for retirement,” he said.